Anti-avoidance rules were originally introduced in 2009 to deem certain dividends in dividend stripping schemes as ordinary revenue (see s 22B) or as proceeds for capital gains tax purposes (par 43A of the 8th Schedule).
These anti-avoidance rules (s 22B and par 43A) were originally aimed at schemes where pre-sale dividends are declared in order to reduce the value (and ultimately the selling price) of the target company’s shares. The seller company then sells the target company shares for a negligible consideration, thereby avoiding a taxable capital gain (or taxable income, if ordinary revenue). The result is a tax benefit for the shareholder company who will, in terms of the scheme, receive a tax-exempt dividend instead of taxable proceeds.
The following example illustrates the working of the scheme, ignoring the application of the anti-avoidance rule: Holdco holds 100% of the shares in Subco which it acquired a few years ago for R2 million. The shares currently has a market value of R7 million (the market value remained the same for the last 18 months). Subco distributes a dividend of R5 million to Holdco which is exempt from tax in Holdco’s hands. Immediately thereafter Holdco sells the shares for R2 million (its market value after the dividend distribution), thereby realising a capital gain of R nil (proceeds of R2 million less base cost of R2 million). Holdco incurs no tax liability in terms of the dividend stripping transaction.
The anti-avoidance rules were introduced to convert the tax-free dividends into ordinary revenue (s 22B) or capital gain proceeds (par 43A of the 8th Schedule) depending on whether the shares are capital or revenue in nature. These dividend stripping rules were broadened in 2017 (amendments to s 22B and par 43A) to also take into account variations in share buyback schemes that taxpayers enter into to avoid taxable proceeds on the outright sale of shares. These amendments apply in respect of transactions finalised by 19 July 2017.
The amended par 43A applies in respect of a qualifying interest which is defined as an interest held by a company (alone or together with his connected persons) in a
- non-listed company, if it constitutes at least 50% of the equity shares or voting rights or at least 20% of the equity shares or voting rights provided no other company (alone or together with his connected persons) holds the majority of the voting rights or equity shares in that non-listed company, or
- listed company, if it constitutes at least 10% of the equity shares or voting rights in that listed company.
The amended par 43A determines that if any company held a qualifying interest at any time during the period of 18 months prior to the disposal, the amount of any exempt dividend that constitutes an extraordinary exempt dividend will be taken into account as taxable proceeds from the disposal of those shares for CGT purposes.
‘Exempt dividends’ means any dividend or foreign dividend that is not subject to any dividend tax, and exempt from normal tax in terms of ss 10(1)(k)(i) or 10B(2)(a) or (b). ‘Extraordinary exempt dividend’ is defined as
- in relation to a preference share (where dividends are determined in relation to a percentage), so much of the dividends as exceeds 15%, and
- in relation to any other share, so much of the dividends as exceeds 15% of the of the higher of
- the market value at the beginning of the period of 18 months, or
- the market value at the date of the disposal
received or accrued within the period of 18 months prior to or as part of the disposal.
The following example illustrates the working of the amended par 43A: Holdco holds 100% of the shares in Subco which it acquired a few years ago for R2 million. The shares currently has a market value of R7 million (the market value remained the same for the last 18 months). Subco then distributes a dividend of R5 million to Holdco (R5 million ‘exempt dividend’ of which R3 950 000 (R5 million less 15% of R7 million) qualifies as ‘extraordinary exempt dividend’). Immediately after the dividend distribution Holdco sells the shares for R2 million. The amended par 43A deems the R3 950 000 million ‘extraordinary exempt dividend’ to be additional proceeds in the hands of Holdco, thereby triggering a R3 950 000 capital gain (proceeds of R5 950 000 (R2 million selling price plus R3 950 000 deemed proceeds) less R2 million base cost).
Similar amendments were introduced in respect of s 22B which applies in respect of shares held as trading stock.
 Par 43A should not be confused with the dividend stripping rules contained in par 19 of the 8th Schedule which deals with the limitation of capital losses in dividend stripping schemes. Par 43A has to be considered in all dividend stripping situations (not only capital loss situations). The par 19 rules will be discussed in a follow-up article.